Do you want to pay a carbon tax or a higher tax?

On Tuesday, President Obama announced that he has ordered EPA to develop a new set of greenhouse gas emissions regulations for power plants, which commenters have guessed might actually mean power plants and other emitters as well. Certainly, it will include new and existing power plants (which have never before been even discussed as a target for greenhouse gas regulation), and my guess it that the EPA will have its hand plenty full without trying to expand its list of enemies.

As I have continued to stump for a carbon tax, it has become clear that messaging has to be directed at politicians that do not believe climate change is actually happening. There are plenty of Republicans and fossil-state Democrats that say they don’t believe the science is settled, but don't believe it, but do feel like they cannot antagonize Tea Party voters that will punish heretics. The new stump speech has to be oriented at providing cover to those who know a carbon tax is the right thing, but are afraid of a challenge from Tea Party candidate who is adroit enough to avoid use of the word "rape" in a sentence.

Part of my new stump speech is this: the Clean Air Act is not going away. The Obama Administration has set a timeline that will pretty much ensure that regulations will be in place by the time he leaves office. The key to that is the deadline June, 2016, by which date states will be required to submit their State Implementation Plans required under section 110 of the Clean Air Act. After that, you can bet that the new EPA regs will be here to stay.

President Obama did not reveal any details of what the new regulations will look like, a bit of a disappointment to environmental organizations. But it is clear that the new regulations will include a New Source Performance Standard for new power plants and a regulation for existing power plants as well, the latter being the most controversial part. The new regulation will be a rate standard, requiring that power plants emit no more than a certain rate of emissions per Megawatt-hour, and most watchers believe that the standard will be something like 1,000 pounds of carbon dioxide per Megawatt-hour. There will also likely be a threshold emissions amount, below which a power plant would not be regulated, and if the tailoring rule is any indication, that threshold emissions amount be 25,000 tons of CO2 per year. If all of the above turns out to be true, then there will be approximately 1,000 power plants that will have to do something to comply with the regulation (plants that emitted at least 25,000 tons of CO2 and emitted CO2 at a rate of more than 1,000 pounds per Megawatt-hour.

Interestingly, the President said he has directed EPA to make use of market base instruments in implementing the new rule. What that means is unclear, but it is probably not cap-and-trade, since that is likely not authorized by the Clean Air Act. It could involve some other form of emissions trading, such as allowing permits to be bought and sold to enable individual emitters to comply with the regulation.

How might that work? It is not unprecedented, as EPA had, earlier in its history allowed trading to achieve compliance. EPA's bubbling policy did not seem to offend any legal strictures under the Clean Air Act.

My guess is that the policy will involve emissions trading, but not cap-and-trade, at least not in form. Firms emitting over 25,000 tons of CO2 will have to get their emissions rate down to 1,000 pounds per Megawatt-hour, and they will be able to buy credits to meet that. That is, the emissions rate, measured over a year (that is my guess as to the relevant time period that EPA will set), is just the calendar year emissions divided by the electricity generated during that same calendar year. If a plant emitted 25,100 tons of CO2 in a year, and generated 50,000 Megawatt-hours of electricity that same year, its CO2 emissions rate would be 1,004 lbs/MWhr, over the limit by 4 lbs/MWhr. It cannot "buy" 4 lbs/MWhr, but must instead buy the 100 tons worth of credits necessary to get its rate down to 1,000 lbs/MWhr. My guess is that an emitter would be allowed to buy the credits to get it below 25,000 tons for a year and therefore out from under regulation altogether; that could potentially allow some small but super-dirty emitters to continue to operate for a relatively small tax.

Oddly enough, this could, under some perfect market assumptions, amount to something like cap-and-trade after all. If we assume that there are no transaction costs, and we assume that there will be trading as long as the price of credits is greater than zero, then this program amounts to cap-and-trade. Here is why. Just imagine now that the CO2 emissions and electricity produced from 2009 are fixed, and will be the same in some future regulated year, say 2018. In 2009, there were 1011 plants that emitted over 25,000 tons of CO2 and at a rate exceeding 1,000 lbs/MWhr; 483 below that rate. The total emissions from those 1,493 plants was 2,395,790,827 tons, or about 2.4 Gigatons, or about 4.8 trillion pounds of CO2. Total electricity generated by these plants was 2,777,582,189 MWhrs, for a total, 1493 plant-wide average of 1,725 lbs./MWhr. Something's gotta give in order for all 1493 of these plants to get to 1,000 lbs./MWhr. Some will have to cut back, some will switch to gas, and some will use carbon capture and storage (maybe), but there cannot be enough buying and selling to get everybody under 1,000.

If we assumed that no plant became more efficient in terms of CO2 emissions per MWhr, and we assumed that the exact same amount of electricity produced in 2018 as in 2009, then it would be a straight cap-and-trade with the cap at 2,777,582,189 MWhrs x 1,000 lbs = 2,777,582,189,000 lbs, or 1,388,791,095 tons. That's a reduction of about Gigaton off a baseline of 2.4 Gigatons.

But here is the catch, and it is the big one: if combustion can be made less carbon-intensive, then there could be an increase in emissions. Imagine a natural gas-fired power plant in emitting below the 1,000 lbs/MWhr rate (natural gas-fired power plants generally do) and generating electricity. Such a plant would have excess credits to sell. What if it doubled in size? Then it would have twice as many credits to sell. It could then turn around and sell those credits until its rate creeps up to 1,000 lbs/MWhr. Notice that nothing in this scenario happened except one natural gas-fired power plant doubled its capacity, and all of a sudden the cap is looser.

This has been just an exercise. There are lots and lots of rules and adjustments that EPA would make, many of them to address the problems highlighted by this blog entry. We have seen a lot of them before in the Clean Air Act Amendments creating the sulfur dioxide cap-and-trade program. The upshot is that this is going to be a very complicated piece of regulation, putting a lot of lawyers to work. As a law professor, I guess that is good news. For the rest of you, it is a tax.

Now, does a carbon tax start to sound better?

Fishing in Massachusetts, Coal-mining in West Virginia

Ed Markey, the climate activists' putative hero, is running for the Senate seat vacated by the new Secretary of State John Kerry. People always think Massachusetts people are strong environmentalists. Even Republican governors William Weld and Mitt Romney (as governors) enjoyed respect from environmental quarters.

Is it really true that the people of Massachusetts are so much more environmentally enlightened than the rest of us? Recently, Massachusetts Attorney General Martha Coakley (remember her? It was her race to lose to replace Ted Kennedy, and sure enough, she lost it to Scott Brown) sued the National Marine Fisheries Service over severe reductions in catch limits for cod, haddock and flounder, because they failed to recover as much as had been hoped.

Why do you think that the stocks did not recover? Could it be that the fishermen-dominated forecasts made by the regional fisheries council might have been overoptimistic? No, it couldn't be that. It is just an invidious and "callous disregard for the well-being of New England fishermen" that will lead to the "extinction of an industry that for more than a century has been a part of the commercial and social fabric of New England...."

According to Coakley, the new limits are based on "shaky science" and "fail to consider economic impacts on fishermen." Shaky science -- sounds like the climate deniers from the hills of West Virginia. Is this just Coakley, never the sharpest knife in the drawer? Well, John Tierney (D-MA) says "NOAA has pushed through this regulation and put our historic fishing industry at risk." Democratic governor Deval Patrick supports Coakley's suit. It was Tierney and Barney Frank, remember, who called for NOAA Administrator Jane Lubchenko's resignation because she sought to lower catch limits. Of course Tierney and Frank know more about fish stocks than Lubchenko, an accomplished oceanography professor.

And Ed Markey, the environmental savior running for Senate? Earlier this year, Congressman Markey lobbied hard to get NOAA to allow fishermen to carry over unused quota from 2012 to 2013. Why didn't fishermen catch as much in 2012? Perhaps there weren't enough fish left to chase. Undaunted, Markey lauded "[t]hese steps will soften the current economic blow for Massachusetts fishermen, but we still have a great deal of work to do if we want to help our fishing communities survive."

This questioning of the science, this political attacking of anyone who threatens your marginal industry, looks a lot like climate deniers from coal regions. But you can understand sort of understand, in a cynical way, why politicians from West Virginia line up against climate change. There really isn't a lot else going on economically in West Virginia. But why does the Massachusetts delegation always go to bat so hard for their fishing industry, an industry that has long past fished itself into oblivion?

On Fracking, the Obama Administration, and Climate Change

Greenwire reported recently that Rep. Rush Holt, a physicist and a Democratic Congressman who represents the district in which I grew up in New Jersey, has complained that the Obama Administration's disposition to hydraulic fracturing, or "fracking" on BLM land is overly generous to the oil and gas industries. He has a point. The federal government may lack the jurisdiction to do much regulating of fracking on non-federal lands (see work by my FSU colleague, Hannah Wiseman), it certainly can require firms on fracking on federal land to comply with construction standards and disclose fracking fluids. A rule released last year for fracking on BLM lands was withdrawn after industry complaints that it was going to be too costly. Really? A seminar paper written by one of my law students, Kaitlin Monaghan, dissected the cost-benefit analysis undertaken by the BLM in arriving at its rule. She found that the cost-benefit analysis was fundamentally biased against environmental values. In the analysis, the BLM assumed that the environmental benefits of regulating -- of either/both requiring construction standards and disclosing fracking materials -- consisted of the costs of, in a "low damage" case (only contaminating one or a few wells), just the cost of drilling a new well. In other words, the BLM assumes that it would be costless to leave for dead an existing water well, as long as it was "small." In a "high damage" case -- extensive contamination of a large aquifer or other groundwater source -- the BLM assumed that the cost was remediation of that water source. Missing from that benefit accounting is the harm that would occur between the time of actual contamination and the completion of the remediation. Would people be harmed by consumption of that water in the meantime? Would there be any interim loss of use by farmers or other water users? Would there be any ecological harm in the meantime? The BLM's answer would apparently be "nope."

I've often wondered, beyond Dick Cheney's "Halliburton exemption" if the Obama administration really was a little too sweet on fracking. Why would that be? My guess is that with the failure of Congress to pass federal greenhouse gas legislation, with failing efforts to construct any meaningful international regime, and with the reality that even if the United States manages to reduce its reliance on coal (not a done deal) other nations may not (the European Union has seen an uptick in coal consumption), the Obama administration has quietly decided that natural gas is the carrot they will offer other countries to reduce their greenhouse gas emissions. Combustion of natural gas emits about half the carbon dioxide per unit of energy produced as does coal, and has been frequently, sometimes over-enthusiastically, as a "bridge fuel." So, if you can't get China to reduce its carbon footprint using sticks, how about using carrots? Instead of futilely browbeating the Chinese into weaning itself from coal, why not export cheap natural gas? In the United States, the fracking revolution has accomplished what decades of political fighting has not -- induced electric utilities to switch from coal to natural gas. Fair enough, but there are limits to the carrot approach. Coal is already pretty cheap, so introducing natural gas as a cheaper fuel has its limits. There is always this pushing-on-a-string problem with trying to induce desirable behavior through carrots instead of sticks.

Boxer-Sanders Carbon Tax: Revenue Projections and Emissions Reductions

Senators Boxer and Sanders claim that their Climate Protection Act of 2013 bill would raise revenues of $1.2 trillion over five years. The bill starts a carbon tax at $20 per ton of CO2, and increases by 5.6% each year for ten years, where it settles at $32.65 per ton. That's not a very high tax, translating to about 30 cents per gallon of gasoline, assuming the current blend of ethanol. But where do the revenue numbers come from? Senators Sanders and Boxer, the co-sponsors, say that is a CBO estimate.

I could find no such CBO study, so I decided to try and re-create the numbers. The carbon tax does not adjust for inflation, so we have to discount future revenue collections from the carbon tax. I assumed a constant discount rate of two percent. One also has to assume a carbon elasticity -- the percentage change of GHG emissions to the percent change of the price of carbon. We don't know that, but there is a lot of research on energy elasticities, and the long-term response is usually somewhere just south of 1. I assume 0.8. It is adventuresome to assume that it will stay constant over a long period of time and range of prices, but I see no principled way to adjust for many uncertainties.

What is the cost of energy? In order to calculate the price effect of a carbon tax, we have to know the baseline energy cost on top of which the carbon tax sits. I average two approximately equal contributors to GHG emissions: electricity and motor vehicle emissions. The average cost of a kilowatt-hour of electricity in the United States is currently 11.53 cents. The average CO2 emissions for a kilowatt-hour of electricity in the United States in 2007 is 1.363 lbs. So for one ton of CO2 emissions, 1467 kilowatt-hours of electricty are produced, which cost an average of $169.

What about motor vehicle emissions? The average price of gasoline in the United States for 2012 was $3.62 per gallon. The average emissions per gallon of gasoline was 8,887 grams of CO2, and 10,180 grams of CO2 for diesel, in 2011. The ratio of diesel to gasoline consumption is fairly stable, and in July 2011 approximately 110,000 gallons of diesel were supplied and approximately 250,000 gallons of gasoline were supplied, so about thirty percent of all motor vehicle fuel is diesel. So in calculating a weighted average of emissions, it seems reasonable to say that the weighted average of vehicular emissions is

           0.30 x 10,180 + 0.7 x 8,887 = 9275 grams, or 0.010224 short tons per gallon

So the average cost of emissions from motor vehicles was about $3.62/0.010224 = $355.

Let's just assume that the average cost of emitting in the United States the average of the cost of emissions for electricity ($169 per ton) and the cost of emissions for motor vehicles ($355 per ton). In 2010, electricity accounted for 34% of all GHG emissions, and transportation 27%, so that's not far off. These are in effect the base cost of emissions, against which a percentage change in price will be measured. In other words, the carbon tax is only a number that sits on top of these baseline costs.

I assumed emissions from 2011 numbers, estimated by EPA, of just CO2 and CH4. That was  5604.9 Tg of CO2 and 582.1 Tg of CO2-eq of methane. The total in 2011 was about 6820 Mt CO2-eq.

Now, just to make this back-of-the-envelope calculation, I assumed that about half of all emissions come from electricity and half come from motor vehicle emissions. I calculated the revenues collected from emissions from both elements, assuming that emissions will respond to the carbon tax. Because the baseline cost of gasoline is higher, a carbon tax creates a smaller incremental price increase in the cost of gas, and would therefore figure less prominently in gasoline users' consumption decisions. In short, we should expect less of a response to a carbon tax in vehicular emissions than we do for electricity emissions.

Under these assumptions, carbon tax revenues would be about $127 billion in the first year, and with a discount rate of two percent, would rise to $199 billion in year ten. The discounted flow of revenues would indeed be about $1.243 trillion.

What about emissions? This is the disappointing part. Assuming a constant carbon elasticity of 0.8, total emissions will only fall from 6820 Mt to about 6101 Mt, a 10.5% decrease. That's not very much.

A Starting Point for Climate Change Adaptation: Get Rid of FEMA Funding for Natural Disasters

I know that sounds drastic, but what is it exactly that *requires* federal government involvement in disasters, really? Is it the scale? Is that we just don't believe that the states of New York or New Jersey can actually afford to pick up the pieces after Hurricane Sandy? Maybe that's not fair, would a state like Louisiana be unable to survive another category 3, 4 or 5 hurricane? Or South Carolina?

Maybe they can't. Maybe they shouldn't. On an NPR show a couple of months ago, 0n a call-in show, a South Carolina resident expressed his love of hurricanes. He said he and his wife were surfers, and they live for the big waves produced by tropical storms. He said they save up vacation days to surf.

I wish I were the guest speaker on that show, because I would like to have dispensed the shame that caller deserved. The US government is in a constant state of fiscal crisis (due in no small part to the Tea Party contingency from that caller's home state of South Carolina), we are cutting back on defense, school lunches, environmental protection, and this surfer dude and his wife want taxpayer dollars to keep rebuilding houses and roads to barrier islands in South Carolina so they can surf.

In graduate school, one of my professors was conservative economist Thomas Hazlett. As one of Rush Limbaugh's closest friends, he frequently found students disagreeing with him. But Professor Hazlett and I found convergence once. After yet another wildfire in Santa Barbara that torched scores of multiple-million-dollar homes, a TV news reporter was interviewing a Santa Barbara resident, a woman who, in her time of distress was wearing some animal fur clothing and carrying a toy dog in her arm, bemoaned, "this is the third time that my house has burned to the ground on this very spot!" Professor Hazlett's reaction: "NO! Really? Do you think it's a coincidence??"

There is no reason that Joe the Plumber should be paying for the reconstruction of a [now] three-million dollar home in Santa Barbara, or for some South Carolina surfer dude's home so he and his wife can surf. But more to the point of this post, many have properly asked, "why should taxpayers pay to rebuild vulnerable structures and neighborhoods in New York and New Jersey in the wake of Hurricane Sandy?" Why, indeed? 

One of the simplest, cheapest, and most sensible adaptation measures to prepare for climate change is to recognize the increasing danger and cost of storms, and to relocate infrastructure and structures away from harm's way. What stands in the way? The stubborn determination of people to not let Mother Nature defeat them.... with the assistance of the US taxpayer, of course.

Because of the politics of disaster relief, a date certain should be set after which no FEMA money  and no federal monetary assistance of any kind should be provided to victims of natural disasters. Setting a date certain will defuse the accusation that relief will be withheld for political reasons.

Without FEMA funding, we'll see who really is resolved to stay put in harm's way. Without FEMA funding, it will be up to states to determine whether they will assist those harmed by natural disasters. And states, already tight for money, will have to choose. In a way, getting rid of FEMA is a way of bringing markets to bear on climate adaptation. If FEMA funding for natural disasters goes, then we will see the value of barrier island homes plummet. And that South Carolina surfer dude will really be bummin.'

GOP Governors Push for Shift to Sales Taxes

The New York Times reported Friday that several Republican governors in red states were considering shifting away from state income taxes and towards state sales taxes. Bobby Jindal of Louisiana, Sam Brownback of Kansas, and Dave Heineman of Nebraska are all considering such a shift, which the Times said was "long championed by conservatives but accepted up to a point by economists of all stripes." Economists believe that long-run growth would be better served by taxing consumption rather than income.

My question is, then why not a carbon tax? If tamping down consumption and encouraging production is a good thing, then why not tamp down only that consumption that leads to more greenhouse gas emissions? My guess is that Jindal, Brownback, and Heineman are all smart enough to secretly believe that climate change is a real risk, but are too afraid to politically approach the subject. Jindal, who lectured the GOP last Thursday to stop being the "stupid party," must certainly recognize that a carbon tax, even in heavily oil-dependent Louisiana, must make economic sense. After all, it's not as if tiny Louisiana's increased efficiency would hurt oil prices. I suppose it would be expecting too much for Louisiana to be like Norway, exporting oil but using the money to internally fund domestic needs, like education. 

A Carbon Tax Would Raise Unemployment.... NOT!

Yippie for David Kreutzer and Nicolas Loris at the Heritage Foundation for a value-laden, but economics-free issue brief that purports to debunk assertions being made that a carbon tax could be good for the economy, made by, among others, me and Yoram Bauman. I address Kreutzer and Loris's three arguments in turn:

1. A Carbon Tax Would Damage the Economy. There is no disputing their base assertions that a carbon tax would increase the cost of energy, and that energy makes up a larger fraction of a poor household's budget than a rich one's. But that completely assumes away the revenues of the carbon tax! Are they assuming, per their argument 3 below, that "[j]ust the sniff of a new revenue stream to the tune of hundreds of billions of dollars annually has the special interests in Washington running to Congress for more handouts"? Are they assuming that the revenues would necessarily be lost to special interest greed? If so, they should say so, instead of making it sound like a third, additional argument against a carbon tax. While residence in Washington, D.C. does of course breed appropriate skepticism about the destination of revenue streams, it seems a bit crabbed to also assume that a carbon tax could not possibly be revenue neutral. British Columbia's "revenue neutral" carbon tax, in fact, has the opposite problem: the provincial government takes in less in carbon tax revenues than it distributes (in the case of carbon tax-linked programs) or forgoes (in the case of lower income and corporate taxes). Besides, what is the logical extension of Kreutzer and Loris's argument? That we should not have any new tax whatsover, because the revenues would some immutable physical law be necessarily gobbled up by hungry special interest groups? Not even Grover Norquist takes such an extreme view, probably because he recognizes that a carbon tax distorts factor markets much less than payroll taxes or income taxes. See Parry and Williams for an analysis. In fact, a revenue-neutral carbon tax, by putting money back into the hands of consumers, would not damage the economy, but help it. See also a posting by James Handley at the Carbon Tax Center on payroll taxes and carbon taxes.

2. A Carbon Tax Would Not Save the Planet. Right on! We can't do things that don't save the planet! Everything we do must save the planet! And everything we do must kick the Chinese and the Indians into action! The problem with climate change is that, in order to reduce emissions, there are a lot of necessary, but not sufficient conditions. The U.S., and the world may never meet all of those necessary conditions. Fair enough. But unless someone starts somewhere, we are resigning ourselves to never doing anything to reduce emissions. Is that what the authors are saying? One important omission from this brief is the statement that climate change is a real risk, and that mitigation would, in the ideal world, be desirable. Do the authors believe that, or not? If so, this argument seems to suggest that we are just doomed, and we might as well hunker down and hope for the best.

3. Revenue Neutrality or a Regulations Swap is Unrealistic. Kreutzer and Loris quote Henry Waxman as saying "[b]ecause it's so complicated, I would not support preempting EPA. EPA can assure us that we can actually get the reductions we need." They conclude that carbon tax or cap-and-trade advocates like Waxman don't actually have any intention of abandoning command-and-control regulation of greenhouse gases under the Clean Air Act. Funny, if you check out Kreutzer and Loris's cite for that Waxman statement, it leads back to a National Journal blog post by Kreutzer. Did Waxman ever say this? I have been unable to find any other support for Waxman's quote. Besides, if you look a bit more carefully at the 2009 Waxman-Markey bill, it is quite clear that cap-and-trade was meant to displace command-and-control regulation under Title I of the Clean Air Act. See a Columbia Law School issue paper for credible analysis of the cap-and-trade bills.